In 2024, the financial services industry will face strong economic headwinds. Usually, this is a formula for downsizing and consolidation. However, today’s headwinds are so strong that the industry will need to:

• Assess and restructure its supply chains to address new priorities such as ESG reporting
• Accelerate customer experience transformation to increase personalization and deliver many new, relevant product offerings
• Sell many more of its operations captives to accelerate digitalization and improve the brand experience across markets and business lines.

Prediction 1: ESG reporting

ESG activities will increase in North America, Europe, and India. There will be an increasing focus on auditability to mitigate “greenwashing” criticisms and make it more difficult for unscrupulous actors to engage in greenwashing initiatives.     

Regulations will drive ESG adoption in 2024. The most advanced and demanding regulations are coming from thought-leading regulators in Europe, the U.S., and India:

Europe (Germany)

• January 2024: the EU’s Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose their risks from environmental and social factors
• December 2023: the European Banking Authority disclosure of assets and activities and their exposure to climate change, customers’ and suppliers’ carbon exposure, Green Asset Ratio (GAR)
• June 2024: the European Banking Authority Banking Book Taxonomy Alignment Ratio (BTAR).

United States (California)

• April 2024: SEC-regulated companies must report their GHG emissions
• December 2024: Companies in California must establish processes for auditing their emissions data in anticipation of the 2026 reporting requirement. 

India  

• April 1, 2024: India’s 250 largest listed entities need to provide value chain ESG disclosures (the largest 150 entities were required to do so in 2023).

These regulations all target supply chain emissions and improve the auditability of enterprise ESG reporting. Many regulations target large corporations but, over time, anticipate lowering the size requirement for reporting ESG activities.

Prediction 2: accelerating digitalization of customer experience

In 2023, banks continued closing branches. 2023 was the fourteenth year of declining branches for U.S. banks, With PNC Bank and U.S. Bank each closing 10% of their branches. The decline of in-person banking options will continue to drive the digitalization of the customer experience. AI, including Generative AI, will drive the increasing adoption of digital customer contact services. The focus in 2024 will be on:

• Hyper-personalization of service offerings in response to a customer’s stated and implied preferences. These AI offerings will deliver less clutter to the customer and drill down to offer a few relevant offerings. Retaining these preferences will enable the customer to maintain an ongoing virtual conversation with the bank, rather than the current state of retelling the bank one’s preferences and goals each time the customer engages with the bank
• Accelerated adoption of open banking partnerships focused on providing specialized lending offerings to customers. Open banking has been slowly developing in response to regulatory requirements. Today’s economy has left banks facing capital and cost challenges, causing them to restrict their lending services. Meanwhile, customers seek customized lending services that meet their need for rapid approval and specialized financing for certain products or services. Open banking will enable banks to offload risk asset creation while enabling FinTechs to provide customers with specialized financing, including green loans. Many FinTech loan offerings delivered by open banking will be embedded finance offerings, becoming the future lending model.  

Prediction 3: selling off captive operations

Financial institutions will sell many of their captive operations to improve cost efficiency. The emphasis will be on realigning costs to transform the bank’s business model. This will drive improved customer experience and greater operational agility across multiple businesses and markets.  

The financial services industry is facing revenue declines and is looking to cut costs. The Financial Times estimates that the 20 largest global financial institutions have cut over 60k jobs in 2023 as of mid-December. This is the largest single-year decline in financial jobs since the Great Financial Crisis in 2008-09. Other industries are doing worse. Bloomberg estimates that 250k tech workers have already lost their jobs in 2023. The final numbers for the global economy will be larger, making cost control an even higher priority for businesses. 

Captives are sold to third parties for three reasons:

• Operations and business model transformation: today’s banking economy necessitates banks transform their operations to service high-volume delivery at lower cost (e.g., premium wealth management services for mass-affluent clients and banking services for previously unbanked populations). Enabling this business shift requires pervasive digitalization of delivery, customer self-service where possible, and AI support for any remaining humans in the loop  
• M&A enablement: banks are exiting non-core business lines and scaling core businesses. Most of the cost benefits of mergers are realized by rapidly integrating the two businesses. Third-party support for integrating the acquired entity into a single shared service center requires a technology operations provider focused on this transformation, after which it will scale down the integration force. Only third parties can provide the necessary skills at scale and still downsize upon completion     
• Cost savings from reducing inputs (primarily labor) and sharing overhead across a larger operational volume (transforming a single tenant operation to a shared services environment).  

Examples of these types of captive acquisitions include:

• Infosys-Stater: Stater is a large mortgage services provider in the Benelux countries. Infosys acquired 75% of Stater from ABN AMRO and is automating and managing its service delivery
• Infosys-Vanguard: Vanguard’s defined contribution business has partnered with Infosys to manage its service delivery, improve customer experience, and move its recordkeeping to the cloud
• TCS-Standard Bank (the largest African custodian):  TCS will centralize and standardize the bank’s custody and securities settlement operations across 15 markets in Africa using TCS’ proprietary securities platform.

These activities will accelerate the digitalization of banking processes and the extent of open banking where institutions partner to deliver offerings to banking customers on shared platforms.

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